A 'two-stage growth' discounted cash flow (DCF) model is built to test whether changes in the underlying market fundamentals help to explain movements in stock prices. Empirical results on two samples of US and EU stocks show that the 'fundamental' earning price ratio (E/P) explains a significant share of cross-sectional variation of the observed E/P, this impact being stronger in the US market. It is also found that: (i) the fundamental component of the E/P has superior explanatory power than simpler measures of expected earnings growth; (ii) 'non-fundamental' components, interpreted as signals reducing asymmetric information (such as firm size, the number of forecasts and the chartist momentum), mitigate the role of the fundamentals; (iii) current deviations from the fundamentals are affected by ex post adjustment of publicly available information in the EU sample. It is argued that differences in regulatory environments and in the composition of investors between the US and EU financial systems may help to explain these comparative findings. Results appear consistent with the 'market integrity hypothesis' postulating that reliance on publicly observable fundamentals is higher when insider trading is lower.

Becchetti, L., & Di Giacomo, S. (2007). Deviations from fundamentals in US and EU stock markets: a comparative analysis. EUROPEAN JOURNAL OF FINANCE, 13(3), 195-226 [10.1080/13518470600880150].

Deviations from fundamentals in US and EU stock markets: a comparative analysis

BECCHETTI, LEONARDO;
2007

Abstract

A 'two-stage growth' discounted cash flow (DCF) model is built to test whether changes in the underlying market fundamentals help to explain movements in stock prices. Empirical results on two samples of US and EU stocks show that the 'fundamental' earning price ratio (E/P) explains a significant share of cross-sectional variation of the observed E/P, this impact being stronger in the US market. It is also found that: (i) the fundamental component of the E/P has superior explanatory power than simpler measures of expected earnings growth; (ii) 'non-fundamental' components, interpreted as signals reducing asymmetric information (such as firm size, the number of forecasts and the chartist momentum), mitigate the role of the fundamentals; (iii) current deviations from the fundamentals are affected by ex post adjustment of publicly available information in the EU sample. It is argued that differences in regulatory environments and in the composition of investors between the US and EU financial systems may help to explain these comparative findings. Results appear consistent with the 'market integrity hypothesis' postulating that reliance on publicly observable fundamentals is higher when insider trading is lower.
Pubblicato
Rilevanza internazionale
Articolo
Nessuno
Settore SECS-P/01 - Economia Politica
eng
asymmetric information; DCF fundamental value; insider trading; non-fundamental components; price earning ratio
Becchetti, L., & Di Giacomo, S. (2007). Deviations from fundamentals in US and EU stock markets: a comparative analysis. EUROPEAN JOURNAL OF FINANCE, 13(3), 195-226 [10.1080/13518470600880150].
Becchetti, L; Di Giacomo, S
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2108/43371
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